Terms and Definitions

A mortgage which allows the lender to adjust the interest rate of the mortgage periodically based on changes in a specified index. Interest rates may move up or down as market conditions change. The change in interest rate will result in a change in the periodic payments due under the mortgage.

The time table of the payments to be made on an amortized loan showing the following information: the date and amount of each payment, the amount of each payment which will be applied to interest and to principal and the balance of principal still outstanding on the loan after the payment is made.

A rate designed to allow for the comparison of one type of loan to another. The APR reflects the cost of your mortgage loan as a yearly rate. It will often be higher than the interest rate designated on the note because it includes items such as interest, mortgage insurance, and loan origination fee (points).

A written analysis made by a qualified person setting forth an estimation of the value of a property, usually after an inspection of the property. The appraisal usually determines the amount of money that a lender will loan on that property.

The process of placing a value on property for purposes of taxation. This may take the form of a levy against property for a special purpose, such as a sewer assessment where the property owner pays a share of the cost according to the valuation of the property.

A preliminary agreement, which is written in evidence of insurance coverage for a limited time. It is usually secured by the payment of an earnest money deposit and is replaced later with a permanent policy.

The amount of cash derived over a given period of time from an income producing property, such as a rental house, after all expenses of holding and carrying the property are paid. Theoretically, the cash flow should be large enough to pay all property expenses including mortgages, taxes, etc.

The refinancing of a mortgage in which the money received from the new loan exceeds the amount due on the old loan. This refinance transaction results in additional cash for the homeowner that can be used for any purpose.

Expenses (over and above the price of the property) incurred by buyers and sellers in connection with the closing of a mortgage loan. This usually involves an origination fee, discount points, appraisal, credit report, title insurance, attorney’s fees, survey, and prepaid items such as taxes and insurance escrow payments.

Additional security for a debt, such as the real estate pledged as security for a mortgage. The lender has the right, if the debt is not paid, to sell the collateral to recoup the outstanding principal and interest on the loan.

A conventional home mortgage, or first mortgage, that allows lenders to give loans up to a specified amount (mandated by Congressional directive) which meets the qualifications for sale or delivery to either the Federal National Mortgage Association (FNMA) or the Federal Home Loan Mortgage Corporation (FHLMC).

Short for Cooperative, a structure of two or more units, owned by a corporation that gives each resident the right to occupy a specific apartment or unit. It is a mode of land ownership where the occupiers of individual units in a building own an interest in the Cooperative Corporation that owns the whole property.

When institutional financing of the purchase of a property does not meet the purchaser’s need, another party may provide additional financing. Creative financing is outside the normal practice of residential financing because the lender does not have to follow the same stringent rules governing the institutional lenders.

An instrument used in many states in place of a mortgage. Title is transferred to a trustee by the borrower, with the lender as beneficiary, until the loan balance has been paid. This document gives a lender the right to foreclose on a piece of property if the borrower defaults on the loan.

A mortgage in which the payment is not sufficient to cover the principal and the interest and the payment portion of the interest is postponed until a certain date at which time the interest postponed is added to the principle owing.

A court order against a borrower if the lender loses money as a result of a foreclosure. The deficiency judgment would be for the difference of the mortgage debt and the amount recovered in a foreclosure sale.

A device used to equalize interest rate yields for lenders and investors. A “point” is one percent of the loan amount. Each discount point paid on a 30-year Fixed Rate Mortgage increases to lenders yield by approximately one fifth of a perfect in interest.

A condition that occurs when funds are being withdrawn from savings institutions by depositors who are in turn investing in instruments yielding a higher return. The result is less mortgage money available for loans, since the short-term instruments being purchased are normally not made available for real estate loans.

An appraisal term for the age of a structure as estimated by its condition rather than actual age which takes into consideration rehabilitation and maintenance. The actual age of a building may be shorter or longer than its effective age.

Any two or more purchasers that wish to purchase real estate together can divide the property’s appreciation. A lender or investor can also offer a lower interest rate in return for a share of anticipated equity.

In general, a procedure whereby a disinterested third party handles legal documents and/or funds on behalf of a seller or buyer. These funds are set aside in an escrow account and held in trust usually to pay taxes and insurance on real estate.

The Federal National Mortgage Association, which is a congressionally chartered, shareholder-owned company that is the largest national supplier of home mortgage funds.It is commonly known as Freddie Mac. The company buys mortgages from lending institutions, pools them with other loans, and sells shares to investors. Detailed information may be found at http://www.freddiemac.com.

An agency of the federal government, within the U.S. Department of Housing and Urban Development The FHA sets standards for the underwriting of private mortgages and insures residential mortgages made by private lenders.

The U.S.’s largest supplier of mortgages to home buyers and owners, a corporation established by Congress and owned by stockholders. It is commonly referred to as ‘Fannie Mae,’ this government-sponsored enterprise is chartered by Congress. This federally chartered agency buys mortgages from lending institutions, pools them with other loans, and sells shares to investors. Detailed information may be found at http://www.fanniemae.com

A government-owned corporation within the U.S. Department of Housing and Urban Development, it is also referred to as ‘Ginnie Mae,’. This government agency guarantees the payment of principal and interest on all of its pass-through securities, and its guarantee is backed in turn by the full faith and credit of the U.S. Government.

A mortgage that usually starts the borrower with low payments that are gradually increased over five to ten years, before leveling off for the remainder of the term of the loan until the loan is fully amortized. Negative amortization usually occurs until the payment reaches the level payment stage. Usually government insured loans (VA or FHA)

A conventional mortgage that would start the borrower out with low payments which are gradually increased over three to six years, until the loan is fully amortized. Negative amortization usually occurs until the payment reaches the level payment stage.

A long-term mortgage whereby the borrower agrees to increase his payment each year by an agreed amount. The added money per payment is applied directly to the outstanding principal on the mortgage, which is thereby paid off in a shorter number of years.

Any rate published by an independent third party (the government, the federal bank, etc.) which serves as the measuring device used to determine if interest rates have gone up or down over time. A wide variety of indexes may be used with Adjustable Rate Mortgages.

Insurance as to who owns a specified interest in designated real estate, and showing as exceptions to the insured interest the defects, liens and encumbrances which exist as against that insured interest.

A technique of reducing the effective interest charged to a borrower. It involves the payment of money to a lender to reduce the borrower’s interest rate either temporarily or permanently. This would help reduce the buyer’s payments and help him qualify for the loan.

A temporary construction loan made during the completion of a home or building, which is usually replaced by a permanent loan after completion and/or sale of the property. It also may be referred to as a short-term loan or a bridge loan.

The amount by which your investment gains or loses (capital appreciation/depreciation and dividend or coupon income) over a given period of time. Usually expressed as a percentage of the original amount invested. A five-percent return means you earned five dollars for every $100 you invested in the stated time period. Investment return can be measured over a variety of timeframes (i.e., one-year, five-years, 10-years, etc.)

Some borrowers will obtain a commitment from a lender to guarantee a certain interest rate or other loan feature for a set period of time, usually from thirty days to one year for a prepaid fee. This can protect a borrower from interest rates rising while the application and closing takes place.

A price estimate obtained for a particular asset if it were sold in an arm’s length transaction on the current market. For Real Estate: The likely price a buyer is willing to pay for a property and the likely price a seller will accept for the property in question.

When the periodic payments on a loan are not sufficient to pay the interest which has accumulated. This results in an increase rather than a decrease in the amount owing on the mortgage. Also referred to as a deferred interest.

Properties that have lab facilities, offices, warehouse facilities, or personal services such as carpentry or machine repair are typically research and development or office/warehouse properties. Each property usually allows a variable combination of office and other uses.

A cap placed on the borrower’s payment rather than his interest rate. The level to which the monthly payment may rise is limited to a certain dollar figure. A typical payment cap used today would be 7.5% of the payment (Roughly equivalent to one percent in interest).

This stands for principal, interest, taxes and insurance. It is representative of the borrower’s actual monthly mortgage-related expenses. Most residential mortgage payments are referred to as P.I.T.I .

A one-time fee you pay the bank for originating a loan. A charge equal to 1% of the loan amount which increases or equalizes the lender’s yield or rate of return. Lenders offer various rate/point combinations.

A mortgage loan that is registered on title after a first mortgage is already recorded. It is behind the first mortgage in priority. In the event of default and sale of the property, the second mortgagee will only be paid if there are funds left after the payment of the first mortgage.

Protection for the lender (lender’s policy) against the consequences of a pre-existing lien or the buyer (owner’s policy) against encumbrance on a property that is discovered after change of ownership.

Facilities that are typically located in the lowest-priced land in older parts of town or on suburban fringes. Frequently, like light industrial/assembly property, office use is limited to management tasks for the facility, or about 15 percent of total space.

Charged as an offset to cover a loss, many mortgage firms borrow funds on a short-term basis in order to originate loans that will later be sold in the secondary mortgage market. When the rate of interest is higher on short-term loans than on long term mortgage loans, the lender has an economic loss.

A secondary financing option in which a new larger mortgage is created to encompass the first mortgage. This large second mortgage is used to preserve the low interest rate on the first mortgage for a potential buyer.